Absa is closing its money market fund, which has almost R86bn in assets under management, citing clients’ mistaken belief that investments in the fund would enjoy the same degree of safety as cash invested in a savings account as the primary reason for closing the unit trust.
In a letter dated April 7, which was posted on Absa’s website, the bank said clients had about 90 days to withdraw their funds from the Absa money market fund and place the proceeds into their bank account or switch their investments into an alternative financial product.
The cut-off date for switching out of the Absa money market fund is July 1 with the winding up of the fund due for completion by July 6, according to the letter.
Sylvester Kgatla, head of Absa Fund Managers, told Business Day the decision followed a recent review of its financial products to assess whether they were aligned to customers’ needs and expectations.
"The outcome of the review highlighted that most of our retail clients mainly require a bank account that is guaranteed by Absa, at an attractive interest rate," said Kgatla.
"Most of our institutional clients want continued access to a money market fund [a unit trust] at a competitive rate. The findings of the review are not inconsistent with our previous notifications to our clients, which reiterated that the Absa money market fund was a unit trust and that capital and returns were not guaranteed.
"In our effort to respond effectively to this insight, we decided to close the Absa money market fund, which was an important decision but certainly a difficult one," he said.
"We carefully considered a range of alternative options, which were deemed unsuited and not in the best interest of our clients. Instead, we are offering each client segment a distinct financial product to suit their needs. We have already extensively engaged our customers about the various options."
While Absa declined to comment further, speculation was rife on social media about possible reasons for the closure.
Financial adviser Magnus Heystek tweeted that Absa’s rationale for closing its money market fund was the "weirdest reason ever". He also questioned why Absa had not simply informed clients that investments in money market unit trust funds were not guaranteed and allowed them to make their own decision about whether to remain invested.
ABSA closes down R81 bn money market fund. Says returns are not guaranteed ...Wierdest reason ever. Why not just tell clients money not guaranteed..let them decide for themselves. Something not smelling sweetly here....
— Magnus Heystek (@MagnusHeystek) April 9, 2021
A spokesperson for Absa declined to comment when asked this by Business Day.
The closure of the Absa fund may be to reduce so-called "step-in risk" which relates to the risk that a bank may have to provide financial support to an entity beyond its contractual obligations should that entity experience financial stress.
"Step-in risk crystallised during the financial crisis as some banks supported connected but unconsolidated entities, including providing credit or liquidity support to securitisation conduits, structured investment vehicles and money market funds," according to KPMG.
While KPMG says the problem of step-in risk has been addressed through post-crisis regulatory reforms, the Basel Committee still considers it a risk and requires banks to undertake regular assessments of possible exposure to it.
A fact sheet for the Absa money market fund shows it was launched on May 2 1997 and had R85.79bn in assets under management up to end-February 2021. It has provided annualised total returns of 8.79% since its launch, compared with benchmark returns of 7.93%.
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